American absorbs Reno Air flights

George Raine, OF THE EXAMINER STAFF

Published 4:00 am, Wednesday, September 8, 1999

With the integration of Reno Air and its 25 aircraft just now kicking in, American Airlines is expanding its north-south service on the West Coast in the hopes of selling more lucrative west-east tickets.

American added the flights this week to increase its presence on the West Coast and give more flight opportunities to customers - as well as take a slice, albeit small, out of United Airlines' market share.

American's acquisition of Reno Air, for $124 million, went into effect Aug. 31.

Reno Air currently flies nine daily nonstops from San Francisco to Los Angeles and five more to Orange County.

American is adding 32 flights a day from San Jose to five destinations - Las Vegas, Los Angeles, Portland, Reno and Seattle. It is also serving Anchorage via Seattle. In addition, American now has 32 daily flights to nine destinations from Reno Air's former hub, Reno.

"Our own customers have been telling us for some time they want one airline network to provide all of their travel needs," said American spokesman Tim Smith from the airline's headquarters at Fort Worth, Texas. "We have wanted to capture that business that goes north and south, along with the business we had been getting - the longer haul (to the East Coast and) to Japan and elsewhere."

The process has not been seamless. American and its unionized pilots, members of the Allied Pilots Association, have squared off over details of integrating the airlines.

The pilots object to American's plan to pay Reno's pilots higher rates as they are retrained by American. The union believes the contract guarantees that the pilots should be paid more from the purchase date.

This led the pilots to call in sick over several days in February, leading to the cancellation of 6,700 flights, inconveniencing 670,000 passengers.

The sick-out cost American $225 million in pretax profit. It also caused a federal judge in Dallas to levy a fine of $45 million against the union, which has $38 million in assets, for ignoring his order to tell pilots to return to their cockpits during the job action.

The money will go to the airline if the union loses its appeal of the order.

In all, the integration of Reno Air adds 182 more daily flights to American's schedule, as well as nearly 2,100 employees. There were no layoffs.

The greatest impact is in San Jose, where American took over Reno's nine flights to Los Angeles, eight to Orange County, five to San Diego, three to Reno, three to Seattle, two to Portland and one to Anchorage (via Seattle).

The new flights are in addition to the service American has long offered from the Bay Area - to Dallas, Chicago, New York, Boston, Miami and Honolulu.

The acquisition of Reno Air was made with the understanding the routes themselves will not be significant money-makers, said Glenn Engel, an analyst at Goldman, Sachs in New York, who follows the airlines industry.

"The bigger issue is this issue called presence. What they're fighting for is the east-west flying, but it helps to be in the north-south market to get a larger share of the east-west flying," said Engel.

The new north-south routes "in no way, shape or form are positioned to be a shuttle service," said Leo Loane, American's regional sales manager for Northern California, in a reference to Shuttle by United, the dominant short-haul carrier at SFO.

SFO is a major United hub, with 250 daily departures (there are 20 from San Jose and 16 from Oakland). The 78 daily SFO-Los Angeles United Shuttle flights are flying at 68 percent capacity this year, said UAL spokesman Joe Hopkins in Chicago.

Now, with American strengthening its hand in the market, said Engel, it will be interesting to see if and how fares are adjusted.

"Passengers still want the cheapest fare," he said.

"So, all things being equal, if American is not offering a fare that is competitive with the other players, they will choose the other guy. If all things are equal, they will want to stick with one carrier."

West Coast fares are relatively low, in any event, and not major sources of airline revenue, said Engel. This helps explain American's strategy of entering one market to gain share in another, the cross-country routes, he said.

"This strengthens their hand, but at what cost?" he asked. "Is it worth the capital investment in Reno and for assets which do not have high return? What would cause them to re-examine it would be if they end up showing huge loses on the West Coast."

Now Playing:

American served San Jose a decade ago but withdrew during the recession of the early '90s (and was replaced by Reno Air).

"But the market has changed, and you don't have the craziness you had in the early '90s," Engel said.&lt;

Latest from the SFGATE homepage:

Click below for the top news from around the Bay Area and beyond. Sign up for our newsletters to be the first to learn about breaking news and more. Go to 'Sign In' and 'Manage Profile' at the top of the page.